jyoti structures

Please refer to important disclosures at the end of this report 1

Y/E March (Rs cr) 1QFY11 1QFY10 %chg (yoy) 4QFY10 %chg (qoq)

Net sales 564 484 16.5 545 3.5

EBITDA 64 54 18.5 71 (8.5)

EBITDA margin (%) 11.3 11.2 (10bp) 13.0 (170bp)

PAT 26 22 18 25 4

Results in line, order accretion down: Jyoti Structures Ltd.’s (JSL) 1QFY2011 results were broadly in line with our expectations, with revenue and net profit growing 16.5% yoy and 18% yoy, respectively. The transmission, rural electrification and substation segments contributed to 70%, 16% and 14% to 1QFY2011 revenue, respectively. Order intake in 1QFY2011 fell by 37% yoy to ~Rs534cr (Rs843cr) on the back of subdued tendering by Power Grid Corporation of India (PGCIL) and state utilities.

Steady performance: The top line reported steady growth of 16.5% yoy to Rs564cr (Rs484cr), while EBITDA margin rose by 10bp to 11.3% (11.2%), resulting in an 18.5% increase in EBITDA to Rs64cr (Rs54cr). Tighter control on the management of working capital led to reduced interest cost as a percentage of sales by 10bp to 3.5%, even though, in absolute terms, interest cost grew by 12.4% yoy to Rs20cr (Rs18cr) for 1QFY2011. The 16.5% top-line growth coupled with stable EBITDA margin and interest cost resulted in an 18% increase in PAT to Rs26cr.

Outlook and valuation: Transmission EPC companies have been riding high on the back of ongoing investments in the domestic power sector. We expect PGCIL to accelerate its capex schedule over the next two years, leading to higher order inflows for transmission EPC companies such as JSL. Apart from transmission projects, JSL is also expected to garner significant portion of orders from RAPDRP and RGGVY schemes. At the CMP of Rs154, the stock trades at 11.4x FY2011E EPS. We maintain our Buy recommendation on the stock with a Target Price of Rs215.

Key financials

Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E Net sales 1,717 2,006 2,447 2,851

% chg 25.3 16.8 22.0 16.5

Adj net profit 80 92 111 135

% chg 10.1 15.3 20.3 22.4

EBITDA (%) 11.4 11.3 11.0 11.0

EPS (Rs) 9.7 11.2 13.5 16.5

P/E (x) 16.1 14.0 11.4 9.3

P/BV (x) 3.1 2.6 2.1 1.8

RoE (%) 21.1 20.1 20.2 20.6

RoCE (%) 19.6 18.5 18.8 19.3

EV/Sales (x) 0.9 0.8 0.7 0.6

EV/EBITDA (x) 7.9 7.1 6.0 5.2

Source: Company, Angel Research

BUY CMP Rs154 Target Price Rs215

Investment Period 12 Months Stock Info Sector Capital Goods

Market Cap (Rs cr) 1,262

Beta 0.7

52 Week High / Low 197/127

Avg. Daily Volume 125,542

Face Value (Rs) 2

BSE Sensex 18,115

Nifty 5,440

Reuters Code JYTS.BO

Bloomberg Code JYS@IN

Shareholding Pattern (%) Promoters 26.8

MF / Banks / Indian Fls 40.7

FII / NRIs / OCBs 18.5

Indian Public / Others 14.0

Abs. (%) 3m 1yr 3yr

Sensex 4.2 13.8 19.7

JSL (6.2) 3.3 (25.2)

Hemang Thaker 40403800 – extn 342

[email protected]

Jyoti Structures Performance Highlights

1QFY2011 Result Update | Capital Goods

August 3, 2010

Jyoti Structures|1QFY2011 Result Update

August 3, 2010 2

Exhibit 1: 1QFY2011 performance Y/E March (Rs cr) 1QFY2011 1QFY2010 yoy (%) 4QFY2010 qoq (%) FY2010 FY2009 yoy (%)

Net Sales 564 484 16.5 546 3.3 2,006 1,717 16.8

Raw Material 324 307 5.5 311 4.2 1,234 1,102 12.0

(% of Net Sales) 57.4 63.4

57.0

61.5 64.2

Erection & Sub contracting 112 76 47.4 88 27.3 304 220 38.0

(% of Net Sales) 19.9 15.7

16.1

15.1 12.8

Employee Cost 17 13 30.8 16 6.3 60 44 37.7

(% of Net Sales) 3.0 2.7

2.9

3.0 2.5

Other Expenses 47 34 38.2 60 (21.7) 181 156 16.3


11.0

9.0 9.1

Total Expenditure 500 430 16.3 475 5.3 1,779 1,521 16.9

EBITDA 64 54 18.5 71 (9.9) 227 196 16.0

EBITDA (%) 11.3 11.2

13.0

11.3 11.4

Interest 20 18 12.4 25 (20.4) 79 68 15.1

Depreciation 5 3 48.7 6 (24.2) 17 9 96.5

Other Income 0.6 0.6

-

13 7 72.6

PBT 40 34 18.6 40 0.4 144 126 14.2


7.3

Total Tax 14 12 19.1 15 (8.7) 52 47 12.4

(% of PBT) 34.1 34.0

37.5

36.3 36.9

Reported PAT 26 22 18 25 5.8 92 80 15.3


4.6

4.6 4.6 (1.3)


Top-line growth momentum continues: JSL’s revenue grew by 16.5% yoy to Rs 564cr (Rs484cr) for 1QFY2011. On the operating front, raw materials as a percentage of net sales dropped sharply by 600bp to 57.4% (63.4%), offset by higher sub-contracting expenses, which increased by 420bp to 19.9% (15.7%) for 1QFY2011. Consequently, EBITDA margin rose marginally by 10bp to 11.3%, resulting in an 18.5% yoy increase in EBITDA to Rs64cr (Rs54cr) for 1QFY2011. Tighter control on the management of working capital resulted in reduced interest cost as a percentage of sales by 10bp to 3.5%, even though, in absolute terms, interest cost grew by 12.4% yoy to ~Rs20cr (Rs18cr) for 1QFY2011. Total debt as on July 31, 2010, stood at ~Rs364cr, including Rs100cr of ECB and Rs250cr of working capital loans. Steady top line coupled with stable EBITDA margin and interest cost resulted in an 18% increase in PAT to Rs26cr (Rs22cr) for 1QFY2011.

Non-convertible debentures (NCD) issue: JSL is in the process of issuing NCD with detachable warrants, aggregating to an amount not exceeding Rs125cr to equity shareholders on a rights basis. The proceeds of the warrants, which are expected to fetch ~Rs300cr–400cr over the next 3–4 years would be utilised for working capital requirements.


August 3, 2010 3

Order book: Order intake during 1QFY2011 declined by 37% yoy to ~Rs534cr (Rs843cr) on the back of subdued tendering by PGCIL and state utilities. Major order intake during the quarter was from PGCIL (Rs254cr) and from Bhutan and Bangladesh utilities (Rs300cr of L1 orders). Order backlog at the end of 1QFY011 was at Rs4,106cr, split across the transmission (68%), rural electrification (21%) and substation segments (11%). Orders from PGCIL account for ~35% of the order backlog, while ~82% of the order backlog is attributable to domestic markets (excluding deemed exports). The Gulf JV i.e., Gulf Jyoti has an order backlog of Rs1,000cr to be executed over the next two years, while the South African subsidiary has bid for 4–5 projects worth Rs600cr, the results of which would be known over the next 30–45 days. Management expects the tendering to gather momentum over the next two quarters and has guided to close FY2011 with an order backlog of ~Rs5,000cr.

Exhibit 2: Order book trend


484 322570

843

408681 665 543

3,616 3,510 3,606 3,959 3,869 4,030 4,150 4,106

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

(Rs

cr)

Order inflow Order backlog


August 3, 2010 4

Investment Arguments

Huge opportunity for transmission EPC players: The government has envisaged an investment of Rs140,000cr in the transmission segment for the eleventh plan, which is an increase of over two times from the investments made in the tenth plan. The scale gets even bigger for the twelfth plan, with a planned investment of around Rs240,000cr.

As per our estimates, this has opened up a potential US $14bn–15bn of opportunity for transmission EPC players during the eleventh plan period alone. Besides, PGCIL, India's largest transmission utility, having spent only ~46% of its planned capex of Rs55,000cr during the first three years of the eleventh plan, is all set to accelerate its capex during the remaining two years, which, in turn, would translate into higher order inflows for the transmission EPC sector. Hence, JSL,

being one of the top three players in this space, would tend to be a key beneficiary of the same.

Robust order book: JSL has a robust order book of Rs4,106cr (2x its FY2010 sales), which provides good revenue visibility to the company and cushions it from short-term order fluctuations. Besides, the company's large domestic presence (~82% of the order backlog) helps to insulate its margins from raw-material price fluctuations and from volatile currency movements. When compared with other EPC companies such as KEC International and Kalpataru Power Transmission Ltd., which have substantial exposure to international projects, JSL’s order backlog is largely skewed in favour of the domestic markets and is, therefore, insulated from the vagaries of fluctuating commodity prices.

Establishing overseas presence: JSL has been actively tapping into overseas markets by entering into JVs in South Africa and the Gulf. The formation of overseas JVs together with the setting up of local manufacturing base would enable JSL to hasten the penetration into newer geographies and build a strong client base. We have not factored these in our revenue model and are awaiting further clarity on the revenue and profitability of these JV companies.

Outlook and valuation: Transmission EPC companies have been riding high on the back of ongoing investments in the domestic power sector. PGCIL has spent ~46% of its planned capex of Rs55,000cr during the first three years of the eleventh plan. We expect PGCIL to accelerate its capex schedule over the next two years, leading to higher order inflows for transmission EPC companies such as JSL. Apart from transmission projects, JSL is also expected to garner significant portion of the orders from RAPDRP and RGGVY schemes. Improving order visibility from PGCIL and other state utilities is expected to help JSL boost its existing Rs4,106cr order book. At the CMP of Rs154, the stock trades at 11.4x FY2011E EPS. We maintain our Buy recommendation on the stock with a Target Price of Rs215.


August 3, 2010 5

Exhibit 3: Actual v/s Angel estimates Particulars (Rs cr) Actual Estimates Var (%)

Revenue 564 587 (3.9)

Operating profit 64 67 (4.3)

PAT 26 29 (10.3)

EPS (Rs) 3.2 3.5 (8.6)


Exhibit 4: Angel EPS forecast Year Angel forecast (Rs) Bloomberg consensus (Rs)

FY2011E 13.5 13.4

FY2012E 16.5 15.6


Exhibit 5: Key assumptions Particulars FY2011E FY2012E

Order inflow (Rs cr) 3,120 3,588

Order inflow growth (%) 20.0 15.0

Order backlog (Rs cr) 4,762 5,427

Order backlog growth (%) 15 14

Order book to sales (%) 34.5 35.0


Exhibit 6: One-year forward P/E band


0

50

100

150

200

250

300

350

Apr

-05

Dec

-05

Sep-

06

Jun-

07

Mar

-08

Dec

-08

Sep-

09

Jun-

10

Share Price (Rs) 5x 9x 13x 17x

(Rs)


August 3, 2010 6

Exhibit 7: Peer valuation

Company Reco. CMP

(Rs) Tgt. price

(Rs) Upside

(%) FY2012E P/BV (x)

FY2012E P/E(x)

FY2010-12E EPS CAGR (%)

FY2012E RoCE (%)

FY2012E RoE (%)

ABB* Neutral 799 - - 4.1 21.4 35.3 22.3 20.8

Areva T&D* Sell 288 218 - 4.9 23.6 11.3 17.6 22.2

BHEL Neutral 2,465 - - 4.9 18.9 21.5 30.4 28.6

BGR Energy Neutral 769 -

4.8 16 31.0 17.7 33.6

Crompton Greaves Accumulate 275 307 10.8 4.4 17.9 7.2 27.1 27.3

Jyoti Structures Buy 154 215 39.8 1.8 9.3 21.4 19.3 20.6

KEC International Buy 490 648 30.9 2.3 9.9 22.3 18.9 26.2

Thermax Neutral 746 - - 5.4 20.2 30.9 31.0 29.5


August 3, 2010 7

Profit & loss statement Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Net Sales 971 1,370 1,717 2,006 2,447 2,851 Other operating income - - - - - - Total operating income 971 1,370 1,717 2,006 2,447 2,851 % chg 39.1 41.2 25.3 16.8 22.0 16.5 Total Expenditure 845 1,199 1,521 1,779 2,177 2,537 Net Raw Materials 588 894 1,102 1,234 1,518 1,776 Other Mfg costs 231 270 376 485 589 681 Personnel 27 35 44 60 71 80 Other - - - - - - EBITDA 125 172 196 227 270 314 % chg 67.7 37.1 14.0 16.0 18.7 16.5 (% of Net Sales) 12.9 12.5 11.4 11.3 11.0 11.0 Depreciation& Amortisation

6 7 9 17 21 24

EBIT 120 165 187 210 249 291 % chg 70.9 38.1 13.4 12.3 18.3 16.9 (% of Net Sales) 12.3 12.1 10.9 10.5 10.2 10.2 Interest & other Charges 33 46 68 79 91 95 Other Income 1 2 7 13 13 14 (% of PBT) 0.9 1.3 5.8 8.7 7.9 6.8 Others - - - - - - Recurring PBT 88 120 126 144 171 210 % chg 89.4 37.4 5.1 14.2 18.8 22.4 Extraordinary Expense/(Inc.)

0.5 4.6 - - - -

PBT (reported) 87 116 126 144 171 210 Tax 32 48 47 52 61 75 (% of PBT) 37.3 41.3 36.9 36.3 35.5 35.5 PAT (reported) 54.5 67.9 79.7 91.9 110.6 135.4 Add: Share of earnings of associate

- - - - - -

Less: Minority interest (MI)

- - - - - -

Prior period items - - - - - - PAT after MI (reported) 55 68 80 92 111 135 ADJ. PAT 55 72 80 92 111 135 % chg 98.8 31.6 10.1 15.3 20.3 22.4 (% of Net Sales) 5.7 5.3 4.6 4.6 4.5 4.7 Basic EPS (Rs) 7 9 10 11 13 17 Fully Diluted EPS (Rs) 7 9 10 11 13 17 % chg 98.8 31.6 10.1 15.3 20.3 22.4


August 3, 2010 8

Balance sheet Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E SOURCES OF FUNDS

Equity Share Capital 16 16 16 16 16 16 Preference Capital - - - - - - Reserves& Surplus 260 325 400 483 582 703 Shareholders’ Funds 276 341 417 499 598 719 Minority Interest - - - - - - Total Loans 159 225 304 369 389 389 Deferred Tax Liability 8 8 8 8 8 8 Total Liabilities 443 574 729 876 995 1,116 APPLICATION OF FUNDS Gross Block 94 106 169 231 262 292 Less: Acc. Depreciation 37 44 52 69 90 114 Net Block 56 62 117 162 172 178 Capital Work-in-Progress

0 1 4 2 1 1

Goodwill - - - - - - Investments 19 16 23 23 23 23 Current Assets 646 824 1,101 1,156 1,478 1,569 Cash 9 14 30 41 52 49 Loans & Advances 106 115 178 201 245 285 Other 91 118 93 110 135 157 Current liabilities 280 331 517 469 680 657 Net Current Assets 366 493 583 688 798 912 Mis. Exp. not written off 2 2 1 1 1 1 Total Assets 443 574 729 876 995 1,116


August 3, 2010 9

Cash flow statement Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Profit before tax 87 116 126 144 171 210

Depreciation 6 7 9 17 21 24 (Inc)/Dec in Working Capital

(141) (123) (74) (93) (99) (118)

Less: Other income 1 2 7 13 13 14

Direct taxes paid 33 47 46 52 61 75 Cash Flow from Operations

(82) (50) 7 3 19 27

(Inc.)/Dec.in Fixed Assets (7) (13) (66) (60) (30) (30) (Inc.)/Dec. in Investments

(2) 3 (7) - - -

Other income 1 2 7 13 13 14 Cash Flow from Investing

(8) (9) (66) (47) (17) (16)

Issue of Equity 105 4 4 0 - -

Inc./(Dec.) in loans (1) 65 79 65 20 -

Dividend Paid (Incl. Tax) 6 8 9 10 12 14

Others (2) 2 1 (0) - - Cash Flow from Financing

98 61 74 55 8 (14)

Inc./(Dec.) in Cash 5 5 16 11 11 (3)

Opening cash balances 4 9 14 30 41 52

Closing cash balances 9 14 30 41 52 49


August 3, 2010 10

Key Ratios Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Valuation Ratio (x)

P/E (on FDEPS) 23.0 17.4 15.8 13.7 11.4 9.3

P/CEPS 20.8 16.0 14.3 11.6 9.6 7.9

P/BV 4.6 3.7 3.0 2.5 2.1 1.8

Dividend yield (%) 0.4 0.5 0.6 0.6 0.8 1.0

EV/Sales 1.5 1.1 0.9 0.8 0.7 0.6

EV/EBITDA 11.3 8.6 7.8 7.0 5.9 5.1

EV/Total Assets 3.2 2.6 2.1 1.8 1.6 1.4

Per Share Data (Rs)

EPS (Basic) 6.8 8.9 9.8 11.2 13.5 16.5

EPS (fully diluted) 6.7 8.8 9.7 11.2 13.5 16.5

Cash EPS 7.4 9.6 10.8 13.3 16.0 19.4

DPS 0.6 0.8 0.9 1.0 1.2 1.5

Book Value 33.3 41.4 50.7 60.7 72.8 87.6

Dupont Analysis

EBIT margin (%) 12.3 12.1 10.9 10.5 10.2 10.2

Tax retention ratio 0.6 0.6 0.6 0.6 0.6 0.6

Asset turnover (x) 2.7 2.8 2.7 2.6 2.8 2.8

ROIC (Post-tax) (%) 20.9 19.5 18.8 17.5 18.1 18.7 Cost of Debt (Post Tax) (%)

12.9 14.2 16.3 14.9 15.5 15.8

Leverage (x) 0.5 0.6 0.7 0.7 0.6 0.5

Operating RoE (%) 25.3 22.8 20.4 19.2 19.5 20.0

Returns (%)

RoCE (Pre-tax) 32.6 32.5 28.8 26.2 26.6 27.6

Angel RoIC (Pre-tax) 33.4 33.3 29.9 27.6 28.1 29.0

RoE 27.9 23.6 21.1 20.1 20.2 20.6

Turnover ratios (x)

Asset Turnover (Gross Block)

10.8 13.8 12.5 10.0 9.9 10.3

Inventory / Sales (days) 37 21 24 26 23 22

Receivables (days) 115 115 123 120 115 114

Payables (days) 68 56 64 62 60 60 Working capital cycle (ex-cash) (days)

134 128 118 118 111 111

Solvency ratios (x) Net debt to equity 0.5 0.6 0.7 0.7 0.6 0.5

Net debt to EBITDA 1.2 1.2 1.4 1.4 1.2 1.1 Interest Coverage (EBIT / Interest)

3.6 3.6 2.7 2.7 2.7 3.1


August 3, 2010 11

Disclosure of Interest Statement Jyoti Structures 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)

Research Team Tel: 022 - 4040 3800 E-mail: [email protected] Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

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jyoti structures

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